Inflation Alert

 by Jerry O’Driscoll  

Yesterday was Cato’s annual monetary conference and Allan Meltzer gave the keynote address.  Today at you can listen to a 7-minute Podcast of an interview with Meltzer summarizing his presentation.  He has just completed the last 2 volumes of his history of the Fed.  

Meltzer delivers a tough message: no nation that is spending as we are, running deficits as large as we are, along with a loose monetary policy, has escaped inflation.  We must cut the deficits by cutting spending.  He talks of a $500 billion spending cut.  And he offers an innovative approach as to how, using applied Public Choice theory. 

There are other tidbits.  He advises the Chinese government and confirmed that they delivered harsh words on deficits to President Obama on his recent visit.  And he completely undercuts the Fed’s specious arguments on indepedence. “The Fed is an agent of Congress.” 

Throughout this recovery, I have found my posiition congruent with those of Meltzer, Anna Schwartz and John Taylor.  I have argued from an Austrian position. I’m not sure what that observation suggests.


10 thoughts on “Inflation Alert

  1. Isn’t Meltzer nothing but an apologist for the Fed? Oh, sorry, so are you, Mr. O’Driscoll. We are in fact not doing so well with the monetary regime we have, and I’m not impressed with Meltzer’s “tough message.” An “inflation alert” should have been sounded . . . oh, say, around 1913.

  2. Though I also fear inflation, I also give credit to other analysts such as Mike Mish who have been right in the recent past alerting about a deflationary trend. Here, for instance: where he claims: “It is important to pick definitions of inflation carefully. A definition based on money supply and credit successfully predicted interest rate trends, stock prices, the price of gold, housing, and numerous other things.

    A definition of inflation based on the CPI failed miserably in predicting interest rates.”

    Maybe the most likety scenario is that after this deflationary period (if we can go out os this) inflation comes in. Bu we have to be careful by prediction hyperinflation is coming (though it is not totally unlikely).

  3. Mr. O’Driscoll, a lot of people say that the obvious counterexample to Meltzer’s thesis is Japan. What do you think of that? I am skeptical whenever Krugman & Co. point to a historical episode as proof of their views, but I haven’t done much research to confidently say they are misreading what happened.

  4. Bob Murphy,

    Japan has high deficits, but not high money growth. The government could finance the debt at low interest rates because the Japanese savings rate was historically high.

    The savings rate in Japan has fallen and some are pedicting a debt crisis. Meanwhile, the media has awakened to the looming debt financing problem in the US. Perhaps Japan and the US do have something in common.

  5. Mr. O’Driscoll,

    What about Krugman’s chart here? It shows the Japanese almost doubling the monetary base, albeit over the course of several years rather than several months.

  6. Bob Murphy,

    In his paper, Meltzer defends the use of the monetary base in the 1951-86 period. I have a query in with him about the more recent period.

    I have not been willing to read much into movements in the base for some time (post-86). The housing boom was financed to a large extent by nonbanks making use of near monies.

    In the U.S. recently, the money multiplier has collapsed. The currency component of the monetary base had grown to something like 95% of the total by the summer of 2008. Since September 2008, the Fed has created reserves at such a rapid rate that reserves now constitute about 50% of the base.

    In the meantime, banks are not using those reserves to make loans. Unless you think this is a permanent condition, somewhere down the road we’re going to get inflation.

    I haven’t looked at Japan for some time. I do recall that the zombie banks were not lending. Only when the problem loans were addressed and the banks restructured did lending resume. I’m not sure on the timing, so don’t want to say more about Krugman’s chart. Perhaps someone else can chime in.

    I have a paper just uploaded on FEEs website that may be useful.

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